Question

a) home's demand curve for wheat is:

D=100 - 20P

its supply curve is:

S= 20 + 20P.

Derive and graph Home's import demand schedule. what would the price of wheat be in the absence of trade?

b) Now add Foreign, which has a demand curve

D* = 80 - 20P,

and a supply curve

S* = 40 + 20P.

i) Derive and graph Foreign's export supply curve and find the price of wheat that would prevail in Foreign in the absence of trade.

ii) now allow Foreign and Home to trade with each other, at zero transportation cost. Find and graph the equilibrium under free trade. What is the world price? What is the volume of trade?

c) Continuing from the previous questions, how imposes a specifici tariff of 0.5 on wheat imports.

i) Determine and graph the effects of the ttariff on the following:

(1) the price of wheat in each country;

(2) the quantity of wheat supplied and demanded in each country;

(3) the volume of trade.

ii) Determine the effect of the tariff on the welfare of each of the following groups:

(1) Home import-competing producers;

(2) Home consumers;

(3) the home government.

Show graphically and calculate the terms of trade gain, the efficiency loss, and the total effect on welfare of the tariff.

Answer 1